Entering into international contracts online is now a commercial fact of life. These contracts can be simple, such as the purchase of a pair of jeans by a consumer, or more complex service agreements between sophisticated legal entities. In both cases, it is customary now to ‘tick’ or ‘click’ a box to accept a set of terms and conditions, whether or not they have in fact been read. These terms and conditions may also include a clause referring disputes to binding arbitration in a foreign country.
Furthermore, companies who seek to rely on these arbitration agreements should be careful not to waive their rights to compel another party to arbitration by taking more than necessary steps in any existing litigation involving this party.
The parties undertook various steps in the proceedings, including mediation.
Readers will be aware that a similar provision in section 8 of the relevant state-based Commercial Arbitration Act which applies to domestic commercial arbitration, stipulates that an application for a stay must be made “not later than when submitting the party’s first statement on the substance of the dispute.”
In determining whether to grant the stay, Judge Beach was required to consider a number of factors, including:
After careful consideration and analysis of all of the above, Beach J found that it was appropriate for His Honour to finally decide all elements of the case despite the applicability of the ‘competence-competence’ principle, the relevant law was Australian and more particularly Victorian law, an arbitration agreement was formed, Dialogue’s cross-application was not made out, and finally, the conditions under section 7(2) of the IAA had been met.
Based on these findings, Instagram’s stay application would ordinarily succeed. However, Beach J was of the view that, applying US law, Instagram had waived its rights to have the relevant matters referred to arbitration.
The existence, validity and scope of the arbitration agreement
The competence-competence principle
According to the ‘competence-competence’ principle of arbitration, arbitrators have the power to determine their own jurisdiction, including any challenge to the validity, existence or scope of an arbitration agreement. So, if on the face of it, there is a valid arbitration agreement that appears to cover the matter in dispute, then this principle would ordinarily dictate that the court proceedings be stayed so that the matters in dispute can be determined by the arbitrators themselves.
In this case, Beach J concluded that while the competence-competence principle applied, he was not bound to apply it. In this regard, Beach J stressed the importance of context, the consideration of which led to the conclusion that, on the balance of probability, His Honour was best placed to determine whether an arbitration between Dialogue and Instagram existed (and later the question of a waiver), and notwithstanding that his Honour also found that California was the ‘seat’ of the arbitration.
Was there an arbitration agreement to which the stay provision applies?
In order for a stay under section 7(2) of the IAA to be ordered, there needs to be a valid arbitration agreement in existence that covers the matter in dispute. Specifically, section 7 of the IAA requires that:
Further, the evidence showed:
After concluding that there was a valid arbitration agreement, His Honour looked at the remaining elements of section 7 of the IAA to be established confirming that the ‘seat’ and relevant procedural law of the arbitration agreement was the law of the State of California as outlined in the arbitration clause and that United States is Convention country for the purposes of the IAA.
Arbitration agreement not an unfair contract term under the ACL
Under Dialogue’s cross-claim which, as aforementioned, His Honour was relatively quick to dismiss, it argued that the arbitration clause amounted to an unfair term under section 24 of the ACL and should therefore be deemed void. In particular, it argued that the arbitration clause was not transparent and limited its rights to sue Instagram (section 25(k) of the ACL). Interestingly, Beach J took an extremely conservative approach to the unfair contract regime in the ACL by cautioning against its application with moralistic sentiments. Specifically, His Honour stated that the term “unfair” ‘is not to be inflated with imprecision or subjectivity, such that “there is no scope to interlard other feel-good factors or niceties in order to remedy any perceived disparity between the parties”, beyond those factors set out in section 24(1) of the ACL.
Did the arbitration agreement cause a significant imbalance between the parties?
Beach J held that the arbitration agreement did not cause a significant imbalance between the parties with a “significant” imbalance being one of such “magnitude or sufficiently large to be important.” In so concluding, Beach J stated that a term does not cause a significant imbalance if there was a meaningful relationship between the term and the protection of a party and that that relationship was reasonably foreseeable at the time of entering the agreement.
Further, in any event, the arbitration agreement did not only favour Instagram, as both parties had the option to invoke the arbitration agreement. Dialogue’s reliance on the alleged unfairness of an “opt-out” clause that provided it with only 30 days to opt-out of the arbitration agreement did not change this view. Accordingly, Dialogue failed to establish that the arbitration agreement caused a significant imbalance between the parties.
Was the arbitration clause reasonably necessary to protect the legitimate interests of Instagram?
Although the above finding was enough to have Dialogue’s unfair term cross-claim rejected, His Honour also discussed why the arbitration agreement was reasonably necessary to protect the legitimate interests of Instagram. In Gonzalez v Agoda Company Pte Ltd  NSWSC 1133 (Gonzalez), it was recognised that the avoidance of litigation in multiple jurisdictions was held to be a legitimate business interest worthy of protection and that inconvenience and cost alone are not likely to be sufficient to establish that submitting to a foreign jurisdiction would be unfair. Therefore, with reference to this decision, Beach J also concluded that Dialogue had failed to argue that the interests that Instagram sought to protect by way of the arbitration agreement were not legitimate and thus the arbitration clause could not amount to an unfair contract term under the ACL. This finding, His Honour noted, was even more prevalent in the era of the COVID-19 pandemic which has seen a move towards remote hearings which make them more convenient and cost-effective. Accordingly, Beach J rejected Dialogue’s unfair contract term argument and maintained that the arbitration agreement should be recognised and enforceable despite Dialogue’s challenges to it.
Given His Honour’s conclusion in relation to this element of the ACL, it is not surprising that Dialogue was also unable to make out statutory unconscionability under section 21 of the ACL.
The final and ultimately decisive element on which His Honour was required to decide was whether Instagram had waived its right to arbitrate under section 7(2) of the IAA and thus invoked the exception contained within section 7(5).
Instagram’s waiver of its right to have the dispute determined by arbitration
Section 7(5) of the IAA provides that a court shall not make an order to stay proceedings if the court finds that the party seeking the stay has waived its rights to arbitrate. In determining this question, Beach J concluded that in this case, US law applied and more specifically the Federal Arbitration Act (9 USC §1 et seq.) § 3, as set out in the arbitration agreement. Further, that His Honour was again not required to invoke the competence-competence principle to the matter of waiver when it could be “efficiently dealt with as a discrete exercise.”
The factors that Beach J viewed as supporting the inference of a deliberate or intentional waiver by Instagram were:
Finally, Instagram’s intentional inconsistent acts caused relevant prejudice to Dialogue such that the undue and unreasonable delays meant that the efficiencies of arbitration had been significantly impaired and valuable resources on ordinary litigation had been wasted.
In light of the above, Beach J held that Instagram had waived its right to rely on the arbitration agreement and its stay application was refused.
This decision is significant for a number of reasons, including:
Since the handing down of this judgment, Instagram has applied for leave to appeal Beach J’s decision to the Full Federal Court.
Authors: Geoff Farnsworth & Melanie Long
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.